The Swedish Banking Crisis

The Swedish Banking Crisis

102300628 Jessica Ahleń

99207215 Anne Tsai

99207222 Yi Tien Gao

Outline

causes effects gov’s responses

A Common Pattern of the Crises

Demirgüç-Kunt and Detragiache (1998):

1. deregulatory financial measures

2. excessive rapid credit expansion

3. an increase in asset prices (bubble)

4. burst of bubble

5. non-performing loans, credit losses, banking crisis

6. currency crisis

7. credit crunch on the private sector,

8. the government measures taken to rescue the banks

Economic Environment Fiscal Policy Boom TriggersEconomic Environment Fiscal Policy Boom Triggers

High Inflation Negative Real Interest Rates

Fixed Exchange Rate

Causes of the Swedish CrisisCauses of the Swedish Crisis

Economic Environment Fiscal Policy Boom Triggers

Causes of the Swedish Crisis

0

2

4

6

8

10

12

14

16

1970 1975 1980 1985 1990 1995

Source: Statistics Sweden

Inflation in Sweden 1970-95



-12

-10

-8

-6

-4

-2

0

2

4

6

8

1960 1965 1970 1975 1980 1985 1990 1995

Source: Englund (1999).

5-year Real After-tax Interest Rate




Deregulation Credit Expansion




Deregulation

Regulations

1. lending ceilings

2. placement

requirements

Deregulation

1983 liquidity ratios was abolished

1985 interest ceilings were raised

loan ceilings and placement

requirements were cancelled



Credit Expansion

• Banks, mortgage institutions and finance institutions

faced an aggressive competition for market share.

• In order to survive in the competition, they expanded

credit to borrowers who want to take on new loans.




-10

-5

0

5

10

15

20

1981 1983 1985 1987 1989 1991 1993

Source: Wallander (1994)

Banks

Mortgage Institutions

Finance Companies

Lending from Banks, Mortgage Institutions andFinance Companies (percent changes)



0

50

100

150

200

250

300

350

400

1975 1980 1985 1990 1995 2000

One- or two dwelling buildings

Buildings for seasonal and secondary use

Multi-dwelling and commercial buildings


Real Estate Index Price

0

2

4

6

8

10

12

1980 1985 1990 1995 2000




Unemployment Rate in Swedenpercentage of the Labor Force



Disinflation

• 1989-1991 tax reform

• 1989 currency regulations cancelled

• late 1980s uplift of interest rates



-12

-10

-8

-6

-4

-2

0

2

4

6

8

1960 1965 1970 1975 1980 1985 1990 1995

Source: Englund (1999).


Outline


Sweden Crisis

• Happened in 1990s

• Peaked in 1992-1993

Housing Market

Commercial Real Estate Market

Process and Effect

Asset Market Financial Market Currency Crisis Fiscal Crisis

Process and Effect


Interest Rate

-12

-10

-8

-6

-4

-2

0

2

4

6

8

1960 1965 1970 1975 1980 1985 1990 1995


Process and Effect

1990’s: excessive holdings of housing real estate bubble


100

150

200

250

300

350

400

1985 1990 1995 2000


Real Estate Index Price

Process and Effect

PEAK50%

3 YEARSGRADUAL RISE


Several problems for real estate companies

Arbitrage

Enter Stockholm Stock Exchange

Many companies bankrupt or restructure

Process and Effect

(the process of buying something such as a commodity or currency in one place and selling it in another place at the same time)


Source: Jaffee (1994) and Catella Property Management

Price Index for Prime Location Stockholm Non-residential Real Estate

Process and Effect

PEAK

500 UNITSGRADUAL

RISE


Process and Effect

• Same trend in housing market & commercial real estate market

Gradual rise

Peak Sharp

fallRecover


Impact on Banks

Process and Effect


Process and Effect


Impact on Finance Companies

Process and Effect

Nyckeln Can’t roll over the market evident

Holders refused to renew funding

Impact whole market for evident

Bankruptcies


Process and Effect

Malfunction Credit losses


BUSINESS PARTNERS

Bank Profits and Credit Losses, 1990–9 (billion SEK)

Process and Effect

PEAK

200 billion Krona between 1990 and 1993


SEbanken 65.6 11.7% 76% 12%New capital from owners in

1993

Handels-banken

73.1 9.5% 38% 9%Survived, met capital

requirements without new capital

Nord-banken

84.2 21.4% 78% 12%New capital from

owner(state)

Process and Effect

Lowest


The Experience of Major Banks During the Banking Crisis

BankTotal

lending in 1985

Losses

of lending

Increase

in lending

1985-8

Real

estate lending

1990

Development

Gota 29.8 37.3 102 16 Bankrupt. Bought by the state

Spar-bankenSverige

78.3 17.6 88 14One billion SEK loan from government, new capital

from owners.

FöreningsBanken

23.1 16.6 67 10Received unprecedented

‘capital requirement guarantee’

Process and Effect


The Experience of Major Banks During the Banking Crisis

Largest

BankTotal

lending in 1985

Losses

of lending

Increase

in lending

1985-8

Real

estate lending

1990

Development

Process and Effect


Process and Effect


• Background: Banking Crisis & Currency

CrisisWeak economy

• Government goal: Improve Swedish

competitiveness

• Result: krona lost 25% to the German mark &

40 % to the US dollar (USD)

Process and Effect


Process and Effect


Unemployment Rate

Private investment and consumption

GDP

Fluctuation of Interest Rate

Source: Jonung, Kaknder and Vartia (2008).

The After-tax Real Rate of Interest, 1988-93(in%)

Process and Effect

PEAK6%

Rapid Raise


Process and Effect

Reasons of the rapid raise from 1990

• Germany Reunification

• Protection of Krona Rate

• Tax Reform

• Domestic Macro Policies


Effects by the upturn of interest rate:

Interest rate rose

Assets price declined

Reduction in wealth

Low private consumption and increase savings

Savings ratio increase to 8%

Process and Effect


0

2

4

6

8

10

12

1990 1992 1994 1996 1998 2000

Process and Effect

Sweden Unemployment Rate, 1990-2000



Process and Effect

Sweden GDP, 1990-1999



Outline


Government responses

• Two main government decisions contributed to the recovery of the crisis

1. Changing from fixed to floating exchange rate regime

2. Bank Bailout

Defending fixed Exchange rate

• Swedish krona tied to the European Currency Unit (ECU) as of March 1991

• Swedish krona was exposed to major speculative attacks

• Government determined in keeping exchange rate pegged

• Defended peg with high interest rates– “there is no ceiling – the sky is the limit”

– Brief period – 500%

– Cost to Sweden = USD 13 billion

Switch to Floating exchange rate

• November 1992, more speculative attacks• Measures were not sufficient to offset the crisis • Riksbank introduced a floating exchange rate on

19 November 1992 • Initially viewed as failure but main driver of

recovery• Substantial, persistent depreciation of the

Swedish currency of close to 30 percent • Depreciation of the currency halted the

downturn• Monetary policy turned expansionary after the

decision to float

Swedish banking rescue

• Sept 1992: govt. announces plan that state will guarantee all bank deposits and creditors of the nation’s 114 banks

• Bailout strategy held banks responsible and turned the government into an owner – Sweden's government assumed the bad debts, but

banks had to write down losses and issue an ownership interest to the government

– bondholders were protected, but shareholders were diluted by private recapitalizations

• International confidence returned after plan was announced

Thank you for listening!

Economy & Finance

The Swedish Banking Crisis